Last week belonged to Bitcoin. Everybody talked about it and we had some records concerning Bitcoin. First, it surged to a new USD record high when it added 100% gains in only 7 days. Then it surpassed 1,000 USD. The fact is that it did so at three important exchanges. And for a while it was traded for as much as one ounce of gold, but then on Friday it slid down 13 % back. Is there a bubble inside it now? I would say that from the short term point of view – yes, there is. There are no foundations strong enough to stand behind this run, and we can await some kind of correction. If history repeats itself, Bitcoin could fall to 500 or 300 USD. But who knows? The fact is that in the longer term, it still has much greater potential than today’s prices.
There is some good news from the EU. The unemployment rate is down by 0.1% and it was 12.1% in October 2013. Among the Member States, the lowest unemployment rate was recorded in Austria (4.8%), Germany, (5.2%) and Luxembourg (5.9%), while the highest rate was is Greece (27.3% in August 2013) and Spain (26.7%). But what is more stunning is the youth unemployment rate (under 25-year-olds). Spain’s youth unemployment rate has reached 57.4%, once again very slightly below Greece, which is still at 58%. Italy and Portugal also experienced notable rises at 41.2% and 36.5% respectively. The figure for the Euro area is 24.4%.
European Central Bank Governing Council member and the head of Estonian central bank, Ardo Hansson, said that the ECB is ready to cut borrowing costs further, and is also prepared to make its deposit rate negative, as we said last week. It is a reaction to the low inflation in the Euro zone, which is close to 0.7% and, according to expectations, will be at most 0.8 % in November. The next meeting of the ECB’s Governing Council will be on 5 December, when the Council will also present new projections for growth and inflation. We will see if the bank has any surprises.
It seems that there is only one opposition to this policy and its leader is Jens Weidmann, president of Bundesbank, who said last week that “Rather than for monetary policy to waltz with fiscal and financial policy, we need to erect walls between banks and sovereigns.” Weidmann also said that “Sovereign bonds should be adequately risk-weighted, and exposure to individual sovereign debt should be capped, as is already the case for private debt.” But if I had to bet on something, I would say that Draghi and company will overwhelm this only with dove´s voice.
Yields on Chinese government debt have soared to their highest levels in nearly nine years. It caused a rise in borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. The rise in borrowing costs and shrinking access to credit could have an impact on the global economy, which rests on the presupposition that China is going to achieve growth. The recent rise in bond yields is because of worsening funding conditions and growing expectations for a tighter monetary policy of PBOC. Interbank rate also rose to almost 6% highest since June 2013 when it was necessary to provide liquidity to the market because of the stress among banking and non-banking entities.
The US celebrated Thanksgiving so not much happened. But we have to be aware of the future more. If you still think that loans in the US are not trouble anymore, just be aware of this. As Reuters informed last week, an increasing number of loans in the US are slowly hitting their 10-year anniversary. This means that borrowers usually must start paying down the principal on the loans, as well as the interest they have been paying all along. For a typical consumer, that shift can translate into their monthly payment more than triply. More than $221 billion of these loans at the largest banks will hit this mark over the next four years – about 40% of the home equity lines of credit now outstanding. Higher delinquency rate coming from this scenario could hit hard the already weak banking sector in the US.
